Technology brings about vast new opportunities

BY MORRIS R. BESCHLOSS
PVF and economic analyst

As my friend and industry colleague Don Caffee, who is secretary/treasurer of the PVF Roundtable, recently said: “You can teach an old dog new tricks.” He was referring to my blogging career in the Gannett-owned Desert Sun for which I write two global economics columns each week. Two months ago I thought blogging was an interactive way of exchanging political insults. The best example is the George Soros-sponsored, ultra-left MoveOn.org. With 3.5 million hits already logged this month, MoveOn’s Kos convention gathered in Chicago last month to be sure that the extreme left kept all 10 candidates present in line.

My economics blogging is encouraged by the Desert Sun, for which I started blogging early in August. Sometimes I do this three times a day, if the constant business, finance and economic activity demands it. This certainly has been true of the mercurial business events that have been swirling throughout the global markets during this historically quiet period. Just the opposite has happened this year, as volatility has never been more intense.

After 78 blogs in a month and a half, I find myself totally immersed in this fascinating subject, which most people can’t comprehend. No wonder it’s called the dismal science. The best gag about economic analysts is the statement that if you laid all economists end-to-end, they still couldn’t reach a conclusion.

If you’re interested in my daily commentaries, visit www.theworldreport.org and then click on the “Beschloss” page. Be sure to press the recommend box at the end of an article.

As I enter my 52nd year as a veteran of the plumbing-heating-cooling-piping industry, I perceive that the overall distribution channel is shifting toward the industrial sector. Verification of this belief emanates from the multi-billions that have gone into the acquisition of the leading PVF segment by two of the most successful private equity partnerships- and the triumvirate of KKR, Clayton Rice Dubilier and the Carlyle Group.

Private equity partner Goldman Sachs has acquired 60% of PVF distribution giants McJunkin and Red-Man Pipe, which have revenues this year estimated at close to $4 billion.

The private equity troika that acquired hd Supply from Home Depot is estimated to be generating an even larger multi-billion-dollar revenue stream.

Add to that the PVF sector of Ferguson (the commercial and industrial component) and you’re looking at possible 40% to 50% of all the pipe-valve-fittings sold throughout the U.S. and Canada.

The savants who put all this money to work in the PVF sector didn’t do it from a newfound love affair with this sector. Their consultants and analysts determined that the domestic industrial sector is on a rebound, with a $1.5-trillion export surge leading the way. You’ll note that The Wholesaler has now committed itself to new levels of involvement with this sector, a transition that I’m personally overseeing.

Global shift narrows U.S. trade deficit

For 16 years America has amassed an ever-widening trade deficit. As the nation’s insatiable consumer appetite had grown from a slight surplus in 1990 to a dangerous 6% of the U.S. gross domestic product in 2006.

Although energy comprised almost 20% of this deficit, America’s huge appetite for imported cars, electronics and a large variety of cheap consumer and industrial goods continued the deficit downward slide with practically no interruption during this period.

But changing global circumstances are about to generate a shift in this runaway disparity. There are several factors behind this turn of events. Although the shift is not yet glacial it could become significant if current trends are maintained in the forthcoming future:

• Exports -- Although relatively slow in growth, from an annualized half a trillion dollars in 1990 to an anticipated $1.6 trillion this year, both product scope and revenues are widening. Among these groups are agricultural products, military hardware, construction machinery, and a spate of high-tech and pharmaceutical goods. Overseas markets for “made in America” are rapidly expanding due to the industrialization of emerging nations and the consequent purchasing power that South East Asia, Brazil, Russia and Mideast nations are amassing. I’m projecting an acceleration of export revenues that will finally begin to close the gap of goods and services outward bound with these incoming.
• The falling dollar -- As the dollar keeps dropping in value against a basket of major world currencies, America’s exports are becoming increasingly competitive. A good example are paper products, which had lost foreign markets due to higher costs. These are being regained as the tables are being turned against such pulp and paper world leaders as Sweden.
• On the import side, the cheaper dollar is having the reverse effect. Although total imports now represent more than a quarter of America’s $13.5-trillion gross domestic product, this peak level may be turning down as imports, including oil products, become increasingly expensive. While the world’s leading producer nations, such as China, India, Taiwan, Brazil, etc. will continue to fight for market position in the world’s No. 1 consumer nation, higher prices are inevitable. These are being caused by a combination of the dollar depression, as well as higher labor costs and benefits impacting labor in developing nations.
• Slowing U.S. economy -- As America’s monetary dislocation, influence by the sub-prime mortgage debacle continues, the slowdown of the massive U.S. economy appears to be stifling demand growth for foreign goods. The U.S. share of global imports has fallen to 14.3%, the lowest since the recession of 1991-92, according to International Monetary Fund. In 2000, the U.S. soaked up 18.8% of world imports. By contrast Brazil, South Africa, India and other developing countries now account for 40.1% of global imports, up from 28.4% in 1991.

With the Federal Reserve Board now committed to a further lowering of the Fed funds rate before the end of the year, there is an increasing danger that the dollar may fall further, aggravating the purchasing power of the greenback vis-a-vis the euro, pound and yen.

This may further reduce imports from abroad, and enhance exports. It may also reduce foreign interest in U.S. government bonds and bills, as the record flush of money coursing through the world’s arteries seeks more attractive return.

But neither inflation nor recession are on our radar screen, and the unanimous decision by the Federal Reserve’s Open Market Committee, which put the welfare of the American economy foremost, will allow the U.S. to face 2008 in a strengthened position.

Labor shortage becomes worldwide

The premise that India and China might be running short of skilled workers seems unbelievable. India ranks second only to China as the most populous country in the world. Together they account for more than one-third of the world’s population.

But according to an article in the Toronto Globe & Mail, a labor shortage is unmistakable. Authorities in China’s coastal Guangdong province say that province is short more than half a million workers. Across Asia, says the Economist Intelligence Unit, most companies report a shortage of qualified staff as their biggest problem. Asia’s fast-growing economies simply can’t meet the demand for skilled people.

A survey by consultants McKinsey & Co. showed that more than three-quarters of Indian companies were not able to recruit enough people. Infosys Technologies, the booming Indian information technology firm, took on 32,000 new people last year. Tata Consultancy Services is bringing on new recruits every day.

The Confederation of Indian Industry projects that the country will require 8 million new factory workers by 2013. New supermarkets and department stores are springing up around the country, adding to staffing needs. Even the airline industry says it will need 3,000 more pilots by 2010.

India’s schools are graduating 2 million English-speaking students a year and more than 500,000 engineers. But the quality of their education is sometimes spotty and many are not fully qualified to work for big information technology firms or multinational giants. In fact, it is estimated that about 60% of graduates who are interviewed lack the basic skills required.

The competition for skilled workers is fierce. Infosys has built a huge new training camp in Mysore, India. It has perks such as gyms, pool tables, swimming pools, cinemas and food courts to draw prospective employees.

Companies in China and elsewhere are handing out cell phones, hiring good cooks for the company cafeteria and laying on shuttle buses to ease the morning commute. Because it’s so expensive to hire and train workers only to lose them to the competition, companies are trying to keep their people productive and loyal.

Even with all the inducements, keeping employees is difficult. Many companies are giving out annual raises of 20% or more just to get people to stay. Some firms in India are reporting attrition rates of up to 25%. Some companies have even reached informal pacts not to go after each other’s staff.

The worst problem is white collar jobs, but even factories are finding it harder to find workers. The flood of migrants heading to the factories of China’s coastal provinces has slowed, even partly reversed. Beijing has lowered rural taxes, making it easier for people to stay near their home areas. Tired of the long hours and low wages of coastal factories, some workers are heading home. To keep people, factory managers have been raising minimum wages by as much as 30%.

The impact of Asia’s labor shortages will be felt worldwide. Competition for staff means higher wages, and that could mean higher prices for consumer goods in the West. In addition, the shortage is also a major problem for Western companies doing business in Asia. Many are finding it more difficult to find trained workers, especially at management levels. But if you’re a young Asian with talent and skills, you are very popular indeed.

China’s economic expansion seems unstoppable

China’s awesome export machine has been the object of ever more fulsome superlatives. How else can one describe the ever-expanding production apparatus that is generating a trade surplus of $10 billion a month. Its latest growth amounted to a 12% expansion.

The Asian titan has become the first nation in history to amass more than $1 trillion in currency reserves, a mark that was surpassed early this year. And there seems nothing on the horizon that would indicate a diminution of the momentum that has made China the fastest-growing industrial machine the world has ever witnessed. Although tainted food and lead-impacted toys have made headlines lately, China will probably overcome these glitches to preserve the powerful brand names it has acquired in the past decade.

But with the target of making the 2008 Summer Olympics the greatest ever, China is also in the process of building new cities the size of greater Indianapolis (3.8 million) every month while leading up to what the Chinese are touting an Olympic extravaganza beyond comprehension.

While developing one of the world’s largest consumer sectors, China has urbanized 300 million of its citizens in the last five years, taking them out of agrarian poverty and providing jobs and purchasing power with premium wages never before dreamed of by this expanding scope of Chinese laborers.

Although nominally Communist, China is a militarily authoritarian state, becoming increasingly more capitalist and ruled by a directorate of professional technologists that continue to monitor and direct the overall policies that engineer the nation’s growth.

Although the military still plays a significant role in industrial ownership participation, its influence is diminishing as China becomes increasingly entrepreneurial. The 1989 outrage of Tiananmen Square has become a watershed between the heavy-handed repression of the old regime and the more subtle political crackdown of the current authorities.

Purchasing power parity (what the local currency can buy in its home markets) is actually pushing China well ahead of the $2.5-trillion gross domestic product that it now generates.

When assessing China’s unprecedented economic successes. its influence on other Southeast Asian countries is reflected by 6,000 years of commercial history and culture that exceeds the longevity of the Judeo-Christian West. Such successes are also exemplified by the exceptional performance of Asian students studying in the U.S. and elsewhere. Their performance reemphasizes the technological excellence and work habits of the Chinese people.

At its current rate of development, China will likely hold the world’s No. 1 position in manufacturing capability and consumer sector expansion by 2050.                   

Morris R. Beschloss, a 51-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.